A
look at Mizoram's finances shows why states in the North East might have
to sack employees and shut down development programmes.

In early
April, PC Zosangzuala lost his job. About three years ago, the
28-year-old had been hired by an Indian government programme which
supports India's middle schools – Rashtriya Madhyamik Shiksha Abhiyan.
The job contract signed by “Peecee”, as his friends call him, suggested
the programme would run till 2017. However, on April 4 or April 5 – he
doesn't remember the exact day – he got a letter from the department
saying the part of the programme that employed him had been closed.

Peecee,
with an earnest mien which makes him look much younger than 28, was not
the only one axed. In all, 366 staffers, mostly lab technicians and
clerks, lost their jobs.

The job cuts have followed a budgetary
squeeze in New Delhi. This year's national budget has slashed central
allocations to the middle school programme from Rs 1,500 crore to Rs
1,010 crore, said a senior official in Mizoram's education department.

Faced with less funds, the central government officialsoverseeing
the programme retained teachers but axed clerks, lab technicians and
counsellors. The Mizoram government could have retained the 366
employees fired by the centre, but their salariesadd up to Rs 6.8 crore a year – money the cash-strapped state doesn't have.

Since
jobs are hard to find in Mizoram, the sacked employees – mostly between
25 and 35 years old – panicked. Some of them had married recently.
Others had become parents. Some others had taken bank loans they were
still repaying. Peecee had taken a loan to pay for the treatment of his
grandmother who eventually succumbed to cancer.

In
late April, 70-80 of them went on a hunger strike. They went without
food for 12 days, calling the fast off only after the state education
minister assured them that whenever the state finds funds, they will be
the first to be hired.

PeeCee lost his job in April.

New formula

In
the weeks and months ahead, Mizoram is likely to see many more such
protests. This is partly due to the 14th Finance Commission, which has
altered the way revenues are distributed between the centre and the
states. Until now, state departments have run on money
from three sources – their own revenues, the state's share of taxes
collected by the centre, and development programmes funded by the centre
and implemented by the states. States with high non-plan expenditure
like salaries but low revenues – like those in the North East – also
receive deficit grant funding from the centre.

One critique of
this system was that a large chunk of the funds received by state
governments were “tied” funds – funds which could be used only for the
purpose defined by the centre. This, it was said, took away financial
autonomy from the state governments.

With the centre accepting
the commission's recommendations on how to overhaul funding to state
governments, all this has changed. In the new system, states' share of
central taxes has risen from 32 per cent to 42 per cent. At the same
time, the centre has cut back on the development programmes it funds in
states. The rationale that has been offered is that states would now get
more funds they can deploy any way they like.

In theory, this
means states can undertake more locally relevant developmental work. But
in practice, while some states gain from the new system, others lose.
Mizoram is one of the losers. In 2014-'15, the state got about Rs 5,300
crore from the centre. This year, after increases in both its share of
central taxes and deficit grant funding, it will get Rs 4,200 crore from
these two sources.However, the centre's decision to cut back on development funding – the third source – might nullify these gains.

Changed ratios

In a previous report, Scroll outlined how the state was struggling to fund its anti-AIDS programme. Its sequel
tried to identify, using the State Health Mission as an instance, the
reasons for this funding crisis. The answer, we found, lay in the
construct of Mizoram's economy.

The state depends on the centre
for as much as 90% of its annual budget. In recent years, as Mizoram's
expenditure has climbed, it periodically runs out of money. At these
times, it redirects central allocations – for health, education and
other schemes – towards more expedient monthly requirements like
salaries or interest payments. As Scroll's reports showed, every time the government redirects funds, the people of Mizoram are deprived of vital services.

At
the same time, given the low revenue generated by the state, some
programmes – like the State Health Mission – are entirely dependent on
central allocations.

But now, the centre is cutting back on those
payments. It has divided its development programmes into three
categories – those it will no longer fund, those it will fund as before,
and those where the ratio between central and state funding will
change.

Typically, the centre used to put in 90% of the money
needed to run a programme. But now, said an official in the Mizoram
finance department, the centre wants to bring down its share to 50-75%
which means the state would need to put in as much as 25-50% of the
funds needed for these schemes. At the same time, the state has to
support the programmes the centre will no longer support.

What does this mean for Mizoram?

A
letter from the state finance department dated 7 May lists 22
programmes where the funding pattern will change and 8 projects that the
centre will no longer fund. Take the Rashtriya Kisan Vikas Yojana, one
of the biggest agriculture programmes running in Mizoram. The
centre-state ratio for scheme until last year was 90:10. Under that
formula, in 2014, after the state government raised its spending to Rs
14 crore, the centre released another Rs 128.9 crore for this programme.

But this year onwards, the state government will have to pay moreto
keep the programme size intact. While the agriculture ministry is yet
to communicate what the new ratio will be, back of the envelope
calculations show that if Mizoram wants the programme to operate at the
same size – Rs 140 crore – it will have to cough up Rs 35 crore (25 per
cent contribution) or Rs 70 crore (50 per cent contribution).

It
is the same story with a set of other critical state programmes – like
the National Health Mission, the state AIDS programme, education
programmes, you name it. If we assume that, between the state and the
centre, Rs 100 crore was being spent on each of the 22 projects. Then,
Mizoram paid Rs 220 crore while the centre paid Rs 1,980 crore. If the
funding ratio for all of them changes to 75:25, then Mizoram now has to
pay Rs 550 crore.

In some programmes, like the Integrated Child
Development Scheme, which runs a network of child care and feeding
centres, the ratio is 50:50. This means the state's contribution would
have to rise steeply to keep the programme intact. At the same time, the
state has to support – or axe – the eight programmes the centre will no
longer fund.

The big question is whether Rs 4,200 crore is
enough for the state to meet its existing expenditure plus these new
commitments. The official in the state finance department doesn't think
so. “The centre is saying that we have to match the centre's allocation.
It will be very hard for the NE states to manage anything more than
90:10, like 60:40 or even 70:30. We cannot do this. In the name of more
fiscal space to the states, why are they taking away these programmes?”

As
it is, the state government may not even get Rs 4,200 crore each year.
As the official said, “Share in central taxes comes with
conditionalities. Which means that the increase (100%) will never be
fully delivered. The 100% is what we can get at the most. A lot also
depends on how much the centre is able to raise in taxes.”

Lack of consultation

But
what is most surprising is this: The centre has accepted and rolled out
the Commission's recommendations without taking the states on board, or
letting them grasp how they would be affected. As the states have come
to understand the full implications of the changes, there have been
belated protests from state chief ministers like Assam's Tarun Gogoi and
Mizoram's Lal Thanhawla. In Mizoram's case, its finance department
officials estimatedtheir new
allocations only when the state received its first monthly instalments
of "share of central taxes" and "deficit grant funding" in April.

At
this time, a month after the new financial year started at Mizoram,
information is still trickling from central departments about the new
ratios. The state has to learn about the new funding ratios, decide
which programmes it can afford and which ones it will have to axe, and
then put in its share.

“They will have to shut down some
programmes," said James Thanga, a professor of economics at Mizoram
University. He pointed out that while the National Rural Livelihoods
Mission and National Urban Livelihoods Mission had just started, other
programmes like AIDS control, farmer development, child nutrition and
health have been running for decades and would have to be continued.

The
departments which survive will see delayed fund allocation this year. A
senior official in the middle education department at Mizoram told
Scroll: “It is mid-May and we still do not know what we will get. We
were about to start construction of new schools – the tendering was
over. But now we are not sure about how much money will come.”

Economic realignment

In
the state, at this time, the funding crisis is still sinking in. Some
feel this might even be a blessing. Successive governments in Mizoram,
as in other parts of the north-east, have been very profligate. The
crisis might force them, some people speculated, to be wiser and stop
relying on Delhi for money.

For this, the state needs to create
more economic activity. But given its location, poor connectivity and
ecological conditions, only some activities are viable here. " We could
invite companies to come and do organic farming or oil palm
cultivation," said the official. "But for that, we would have to give
them large swathes of forestland.” Apart from the questions about forest
loss and oil palm's environmental impact, these activities will also
take time to establish themselves and generate revenues.

And time is what Mizoram doesn't have. The funding crisisis already here.

Can
Mizoram emerge unscathed from the looming crisis by merely curbing
wasteful expenditure or will deeper cuts need to be made? At the same
time, will the government want to cut back on the programmes it uses to
dole out patronage? If they make deeper cuts in social programmes, then
what happens to the people? Like the health reports showed, things are
already grim.

These are the questions that state officials are
struggling with. “How do we do this? There are no state assets to sell,"
said the official in the finance department. "We will have to borrow
against future remittances of the state.” I ask what that means. The
official says: "future payments like salaries".

In essence, the
government will take a loan and repay it from the next year's central
allocation. That will worsen the financial shortage that year. If the
state does follow that plan, a vicious cycle will begin.

The
other course of action, suggested Thanga, the economics professor, could
be raising revenues by charging for land transactions and increasing
the professional tax. With the lifting of prohibition, he said, loss
making public sector units – the state industrial corporation, the
agriculture marketing corporation, even the state handloom and
handicraft development corporation – have applied for liquor
distribution licenses. “This should help them become viable," he said.

But
the question that is the most difficult to answer: why did the centre
force such an abrupt transition on the states? It is going to impose
penalties on the people of Mizoram and elsewhere.